Allocation Scenarios: Preliminary Analysis April 22 nd, 2008 Snuller Price, Partner Energy and Environmental Economics, Inc. 101 Montgomery Street, Suite 1600 San Francisco, CA

2 Allocation Scenario Analysis Starting point: CEC/CPUC Staff paper on Options for Allocation of GHG Allowances in the Electricity Sector  Applies four evaluation criteria to allocation methods 1) Consumer cost, 2) transfers among customers of retail providers, 3) administrative simplicity, and 4) impact on new entrants Scenario analysis applied GHG calculator to evaluate transfers among customers of retail providers  Results are still preliminary, since model is not finalized  Results provide insight into direction of trends of the transfers between LSEs under different allocation methods  All scenarios assume $30/t CO2 price, 20% RPS, reference EE goals, any revenue return used to reduce rates

3 ‘Mock-up’ of CO2 Market Control Panel

4 Modeling Differences to Staff Paper Output-based allocation provides allowances to all generators on the basis of MWh generated  Excluding zero-carbon deliverers is an option Setting the baseline allocations  Output-based allocations is based on current year output, updating for every year 2012 to  Emissions-based allocations are based on 2008 planning year. Since 2008 model has planning level hydro and thermal output, a multi-year baseline is not needed for the model. Sales based auction revenue return is based on actual sales, and not sales adjusted by EE achievements.

5 Market Clearing Price including Carbon Including CO2 in the wholesale market increases the MCP Same market price results from all allocation models  Currently, there is no market price reduction assumed for output based allocations Marginal Cost of Generation w/o CO2 price MWh $/MWh Demand Marginal Cost of Generation with CO2 price Price* w/ CO2 Price w/o CO2

6 Emissions Intensity by LSE Scenario: 20% RPS, BAU reference case EE, no carbon market

8 Seven Allocation Scenarios 1. ‘Pure Emission-Based Allocation’ 2. ‘Pure Output-Based Allocation’ a) Pure Output-Based Allocation excluding non-fossil generators 3. ‘Pure Auction’ with no Auction Revenue Recycling 4. ‘Pure Auction’ with Auction Revenue Recycling 5. Staff ‘Preferred Emission-Based Allocation’ proposal 6. Staff ‘Preferred Output-Based Allocation’ proposal 7. Staff ‘Preferred Auction’ proposal

9 Metrics Net Cost of CO2  Additional cost passed on to LSEs from energy deliverers from introduction of the CO2 market, net of any administrative allocation and auction revenue return Average Retail Rate Projection  Average rate levels by LSE in 2020

10 Scenario 1: ‘Pure Emission-Based’ Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE 100% administrative allocation based on historical 2008 emissions

11 Scenario 1: ‘Pure Emission-Based’ 100% administrative allocation based on historical 2008 emissions Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

12 Scenario 2: ‘Pure Output-Based’ 100% administrative allocation based on updating yearly output (GWh) Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

13 Scenario 2: ‘Pure Output-Based’ 100% administrative allocation based on updating yearly output (GWh) Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

14 Scenario 2a: Pure Output-Based Allocation excluding non-fossil generators 100% administrative allocation based on updating yearly output (GWh) Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

15 Scenario 2a: Pure Output-Based Allocation excluding non-fossil generators 100% administrative allocation based on updating yearly output (GWh) Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

16 Scenario 3: ‘Pure Auction’ – no revenue recycling Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

17 Scenario 3: ‘Pure Auction’ – no revenue recycling Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

18 Scenario 4: ‘Pure Auction’ with revenue recycling 50% revenue recycling based on LSE sales, 50% based on 2008 emissions Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

19 Scenario 4: ‘Pure Auction’ with revenue recycling 50% revenue recycling based on LSE sales, 50% based on 2008 emissions Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

20 Scenario 5: ‘Preferred Emission-Based’ Staff Straw Proposal If emission-based allocation is adopted, staff recommend: 100% admin. allocation starting with split between emissions and output based allocation, with transition to 100% output-based Allowances allocated only to fossil-fuel based generators Year% allocated on emissions basis % allocated on output basis % %60% %70% %80% %90% %100%

21 Scenario 5: ‘Preferred Emission- Based’ Staff Straw Proposal Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

22 Scenario 5: ‘Preferred Emission- Based’ Staff Straw Proposal Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

23 Scenario 6: ‘Preferred Output-Based Allocation to Auction’ Staff Straw Proposal If output-based allocation is adopted, staff recommend: Transition to 100% auction This scenario: 100% revenue recycling based on 50/50 split btwn emissions and LSE sales Allowances allocated to all generators Year% allocated on output basis % auctioned %10% %20% %30% % %70% %90% %100%

24 Scenario 6: Administrative allocation transitioning to auction 50% revenue recycling based on LSE sales, 50% based on 2008 emissions Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

25 Scenario 6: Administrative allocation transitioning to auction 50% revenue recycling based on LSE sales, 50% based on 2008 emissions Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

26 Scenario 7: ‘Preferred Auction’ Staff Straw Proposal If auction is adopted, staff recommend: 100% auction revenue recycling on historic emissions basis transitioning to sales-basis YearRevenue recycling on emissions basis Revenue recycling on sales basis %0% %5% %10% %15% %20% %30% %40% %

27 Scenario 7: ‘Preferred Auction’ Staff Straw Proposal Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

28 Scenario 7: ‘Preferred Auction’ Staff Straw Proposal Scenario: market clearing price of $30/t CO2, 20% RPS, BAU reference case EE

Thank You